Crude Oil

Oil prices slide on a potential US$65-70 Russian oil cap: Woodside shares unphased

Thu 24 Nov 22, 10:39am (AEST)
barrels of oil
Source: Unsplash

Key Points

  • G7 nations is discussing a price cap on Russian oil between US$65-70 a barrel
  • Russian oil currently trades at a slightly discount to the proposed price cap
  • The 'generous' cap sees little disruption to Russian supply, which weighed on oil prices

Oil prices tumbled more than 4% overnight as the Group of Seven (G7) nations seek to cap the price on Russian oil at a premium to current levels.

Brent crude fell -4.4% to US$84.5 a barrel on Wednesday, down almost -10% in the last six sessions and close to late September lows of US$83.9 a barrel.

European representatives were discussing a potential price cap in the range of US$65-70 a barrel for Russian oil, most commonly referred to as Urals. Diplomats remain divided on the price cap level and discussions are expected to resume on Thursday.

Still, Urals crude delivered to northwest Europe trades for around US$62 a barrel and around US$67 a barrel in the Mediterranean, according to Reuters.

"But it's a defensive play and hardly qualifies as something that proactively helps Ukraine. In terms of production cuts, Putin has seemed completely happy with the status quo, which a cap of $65 preserves. Europe does not look good here," said Robin Brooks, Chief Economist of the Institute of International Finance.

Why its bad for oil prices

It's a cap that doesn't really cap. Russia can continue to supply G7 nations without much disruption given the cap level exceeds the current price of Urals.

In fact, the complete opposite was happening in the lead up to the price cap discussions, with European buyers desperately loading up on Urals.

"Just days before the US and European Union impose fresh sanctions on Russian energy — supposedly the strongest thus far — Moscow has lifted its oil output to the highest level since its invasion of Ukraine," Bloomberg reported.

In the absence of a more aggressive cap, Russian oil will likely continue to flow over the winter. While not so great for punishing Russia and restricting its oil income, it does mean there's more oil on the market and subsequently, lower prices.

Oil stocks unphased

Woodside (ASX: WDS) shares fell -0.75% as the market opened. Energy stocks seem relatively unphased by the recent weakness in oil, with Woodside trading just 2-3% away from recent highs.

The growing disparity between oil and energy stocks suggests something eventually has to give. Are energy stocks getting ahead of themselves or will oil rise back up to the occasion?

Woodside versus oil price
Woodside (orange) versus Brent crude (blue)

 

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Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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